By James Sundquist
In the wake of the COVID-19 pandemic, 90 countries have approached the International Monetary Fund (IMF) for some form of economic assistance. As in decades past, a multitude of developing countries appears to need debt relief or restructuring. Yet, while a wave of debt crises is hardly unprecedented, this instance has one unusual feature: many of these countries have borrowed from China, in addition to traditional creditor governments.
Before the pandemic, many developing countries benefitted from the fact that China and the IMF did not always see eye to eye. Empirical research by the Boston University Global Development Policy (GDP) Center has shown that governments were able to secure a loan from China sometimes avoided beginning an IMF program when one seemed likely. Others agreed to an IMF program but used access to Chinese financing to negotiate for fewer promises to reform their economies. In other words, China could occasionally substitute for the IMF, with very different terms attached to its loans. Does this mean that governments can continue to benefit from this dynamic in an era of debt renegotiation?
The answer appears to be “no,” for at least three reasons. First, even before the pandemic struck, China was retrenching its volume of new lending to the developing world. The China’s Overseas Development Finance Database, managed by the GDP Center, shows that total lending began falling after reaching a peak in 2016. Notably, China’s policy banks have not extended any new loans to Latin American countries in the previous two years. With China less eager to lend, it is more difficult for governments to find a substitute source of financing.
Second, China’s track record on the issue of debt restructuring is one of rescheduling, not forgiveness. While China has canceled more than $3 billion in debt to African countries between 2000 and 2019, these actions have only applied to concessionary, zero-interest loans, which do not make up the bulk of Chinese lending. China has proven willing to lend when others will not, but so far it has not shown itself particularly willing to write off debts.
Third, whereas it takes only one creditor to extend a loan, restructuring old debt typically occurs in coordination among major creditors. Historically, the IMF has worked closely with the Paris Club of creditor governments on this issue. China is not only not a member but has included “no Paris Club” clauses in its loan agreements that prevent borrower governments from including them in Paris Club negotiations. China’s decision not to negotiate in concert with fellow creditors may seem perplexing at first glance but is rooted in its determination to present itself as a member of the Global South and not simply another wealthy country.
The upshot is that Paris Club countries, particularly the United States, may balk at the prospect of forgiving debt without Chinese commitments to do the same. At the Fund, the United States will use its influence to ensure IMF packages are not used to repay Chinese lenders. Geopolitical competition that once helped developing countries secure new loans now threatens to hurt them when negotiating for debt forgiveness.
Evidence of China’s reduced willingness to substitute for the IMF is visible in the decision of several governments with a record of heavy borrowing from China to approach the Fund for assistance. Pakistan in 2019, Djibouti in 2020, and Zambia in 2021 are perhaps the most notable examples, with Sri Lanka potentially following this year. The one forum for debt restructuring that includes both China and Paris Club countries, the G20 Common Framework for Debt Treatments, also requires participants to have an IMF program in place.
The first wave of debt crises in which a member of the Global South is also a major creditor thus appears to be less different from previous waves than might be expected.
James Sundquist is a Global China Pre-doctoral Research Fellow with the Boston University Global Development Policy Center and a PhD candidate in Political Science at Yale University.
